Thursday, August 10, 2006

Stern Warnings

My comments on Monday about the shutdown of the Prudhoe Bay field in Alaska weren't the only ones to connect the event to further drilling in the Arctic. The Wall St. Journal (subscription required) cited this incident as direct evidence of the need to develop the Arctic National Wildlife Refuge. Environmentalists saw it instead confirming that arctic drilling isn't worth the risks. Others simply focused on the difficulty of exploiting resources in such inhospitable regions. But amidst all of this, a simple fact has been lost: in the status quo case, within fifteen years natural depletion is expected to reduce production from the North Slope permanently, by roughly the same amount as this short-term shutdown. That is the real context for any discussions of wider oil exploration in Alaska, and for our response to today's high energy prices.

Within the space of a year, we've seen hurricanes knock out the lion's share of Gulf Coast offshore oil production--simultaneously retarding future development projects--and a pipeline problem cripple the Alaskan North Slope. Although the full extent of the latter isn't yet clear, and limited workarounds may still be possible, these are stern warnings about our future.

Without major discoveries and development in Alaska, the North Slope will continue its decline, which is already well under way. Without geographic diversification from wider access to offshore resources, the planned deepwater developments in the portion of the Gulf of Mexico presently open for drilling won't offset the decline of our entire mature onshore and close-offshore production base. These shifts are pre-determined, and they will keep our energy costs high, even if new production from Russia or West Africa fills the gap, globally.

There are important differences between the crisis management associated with a sudden disruption and the careful planning associated with the slow, gradual decline of a major supply source. The impact of a temporary price shock is also not the same as that of a sustained increase in oil prices. But that doesn't mean that the former lacks lessons for the latter. The production problems we've experienced in the last year presage the further deterioration of our energy trade balance, at a time when we are more focused on energy security than we have been in decades.

While I remain enthusiastic about the potential for new technology and alternative fuels to reduce our dependence on imported oil over the long haul, I recognize the daunting scale of our energy usage and the delays inherent in turning over the vehicle fleet and moving technology from the test bed to the mass market. If we want lower energy prices any time soon, then we must aggressively reduce our demand and increase the supply of conventional fuels. And we must also recognize that lower prices, with all their benefits for the economy and consumers, would postpone the day when alternatives become competitive without subsidies.

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